Final Course

(Revised Scheme of Education and Training)

Study Material

Elective Paper 6A
Risk Management

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

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This study material has been prepared by the faculty of the Board of Studies. The objective of the
study material is to provide teaching material to the students to enable them to obtain knowledge
in the subject. In case students need any clarifications or have any suggestions for further
improvement of the material contained herein, they may write to the Director of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for the
students. However, the study material has not been specifically discussed by the Council of the
Institute or any of its Committees and the views expressed herein may not be taken to necessarily
represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.

© The Institute of Chartered Accountants of India

All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or
transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without prior permission, in writing, from the publisher.

Updated Edition : August, 2019

Website : www.icai.org

E-mail : bosnoida@icai.in

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SYLLABUS
PAPER 6 A: RISK MANAGEMENT
(One paper – Three hours – 100 marks)
Objective:

1. To gain knowledge and an insight into the spectrum of risks faced by businesses and to learn
techniques of managing risks.
2. To build capability for applying such learning to address risk related issues in real business
scenarios.

Contents:

1. INTRODUCTION TO RISK
• The Concept of Risk
• Risk and Uncertainty : Distinction
• Classification of Risks
• Dynamic Nature of Risks
• Types of Risk (illustrative list)
 Strategic and Operational Risks
 Business Risk
 Financial Risk
 Information Risk
 Liquidity Risk

2. SOURCE AND EVALUATION OF RISKS

• Identification and Sources of Risk
• Quantification of Risk and various methodologies
• Impact of Business Risk
• Identify and assess the impact upon the stakeholder involved in Business Risk
• Role of Risk Manager and Risk Committee in identifying Risk

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3. RISK MANAGEMENT
• Concept of Risk Management
• Objective and Process of Risk Management
• Importance of Risk Management
• Risk Management techniques

4. EVALUATION OF RISK MANAGEMENT STRATEGIES

• Risk Management Strategy alignment with Business Strategy
• Internal Control environment and linkages with Risk Management
• Risk Culture and attitudes to risk management
• Integrated Risk Reporting and Stakeholder responsibilities
• IT Risk Management – Disaster Recovery

5. RISK MODEL
• VAR
• Stress Testing
• Scenario Analysis
• Country and Sovereign Risk Models and Management

6. CREDIT RISK MEASUREMENT AND MANAGEMENT

• Understanding the component of credit risk
• Evaluating credit risk
• Mitigating Credit risk
• Qualitative and Quantitative techniques to manage risk
• Credit scoring models

7. RISK ASSOCIATED WITH CORPORATE GOVERNANCE

• Evaluation of Risk Associated with Governance
• Description and evaluation of framework for Board level consideration of risk
• OECD Guidelines for Corporate Governance

8. ENTERPRISE RISK MANAGEMENT

• Definition, Scope and Techniques

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9. OPERATIONAL RISK MANAGEMENT

• Definition, Scope and Techniques
Following topic are covered in the paper of Financial Management (Paper 7 Part I,
Intermediate Level) and Strategic Financial Management (Paper – 2, Final Level) also
forms the part of the syllabus
• Risk Management in Investment Decisions
• Foreign Exchange Risk
• Interest Rate Risk

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BEFORE WE BEGIN …

Revised Scheme of Education and Training: Bridging the competence gap

The role of a chartered accountant is evolving continually to assume newer responsibilities in a
dynamic environment. There has been a notable shift towards strategic decision making and
entrepreneurial roles that add value beyond traditional accounting and auditing. The causative
factors for the change include globalisation leading to increase in cross border transactions and
consequent business complexities, significant developments in information and technology and
financial scams underlining the need for a stringent regulatory set up. These factors necessitate
an increase in the competence level of chartered accountants to bridge the gap in competence
acquired and competence expected from stakeholders. Towards this end, the scheme of education
and training is being continuously reviewed so that it is in sync with the requisites of the dynamic
global business environment; the competence requirements are being stepped up to enable
aspiring chartered accountants to acquire the requisite professional competence to take on new
roles.
Introducing “Electives”: Significant feature of the Revised Scheme of Education and
Training
In the Revised Scheme of Education and Training, the concept of electives is being introduced at
the Final level in line with the school of thought that specialisation is the key to developing
professionally competent chartered accountants. As per this school of thought, an emerging
chartered accountant has to be geared up to assume new roles as consultants and advisors,
necessitated on account of growing business complexity, dynamic changes in legislations and
regulatory requirements and client expectations.
The seven core papers, namely, Financial Reporting, Strategic Financial Management, Advanced
Auditing and Professional Ethics, Corporate and Economic Laws, Strategic Cost Management and
Performance Evaluation, Direct Tax Laws and Indirect Tax Laws, represent the competence areas
in respect of which an aspiring chartered accountant has to be technically well equipped,
regardless of his intended future specialization or role. These subjects, in fact, provide the base to
enable an aspiring chartered accountant to specialize in any professional accounting role. For
instance, the core paper on direct tax laws and international taxation lays the foundation for further
specialisation in the area of international taxation. Further, consequent to borderless economies, it
has become imperative that subjects which transcend the borders be added in the curriculum, for
instance, Global Financial Reporting Standards and International Taxation.
The six elective papers introduced in the Revised Scheme are Risk Management, Financial
Services and Capital Markets, International Taxation, Economic Laws, Global Financial Reporting

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Standards and Multi-disciplinary case study. Students have to opt for one out of these six papers
keeping in mind their desired area of specialization.
Framework and brief introduction of chapters
The study material of Elective Paper – Risk Management is prepared by mentioning the current
scenarios in the Risk Management wherever required. The chapters are prepared in such a
manner so as to give the readers an insight into the Risk Management presently operating in India
and abroad. Similarly, students will also get familiarized with the various concepts of Risk
Management. In the chapter, Risk Model, some of the new concepts currently in vogue have been
introduced such as VAR, Stress Testing, Scenario Analysis and Country and Sovereign Risk
Management. Similarly, in the Chapter, Credit Risk Measurement and Management, certain
interesting topics such as evaluating and mitigating credit risk, Qualitative and Quantitative
techniques to manage risk, Credit Scoring Models has been lucidly explained.
Corporate Governance plays an important role in the arena of Risk Management in India.
Therefore, the chapter ‘Risk Associated with Corporate Governance’ has been added. This chapter
throws light on Evaluation of Risk Associated with Governance, Description and evaluation of
framework for Board level consideration of risk and OECD Guidelines for Corporate Governance.
Further, chapters namely, Enterprise Risk Management, Operational Risk Management and
Evaluation of Risk Management Strategies have been added to give wide coverage to the
subject Risk Management. In these chapters, some interesting topics have been added to give a
new flavour to this dynamic and ever evolving subject.
Features of this study material
There are several significant characteristics of this study material which are outlined as below:
(i) It comprehensively covers the course requirements of students preparing for Risk
Management paper.
(ii) The chapters have been organized in such a manner that the concepts of the students are
cleared in a step by step process.
(ii) It is written in a very simple and lucid manner to make the subject understandable to the
students.
(iii) At the beginning of each chapter, learning outcomes have been given so that the students
have some sort of idea about what he will learn after going through the chapter.
(iv) Efforts have also been made to cover contemporary topics in various chapters of Risk
Management Paper e.g. VAR, Stress Testing, Scenario Analysis, Artificial Intelligence and
Business Analytics etc.
(v) While preparing the study material, it has been kept in mind that students understand the
study material. Therefore, it has been endeavored to keep the chapters concise, giving
appropriate headings, sub-headings and mentioning examples at suitable places.

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Strategy to approach this study material

It is desired from the students that they cover the entire syllabus and are also required to visit
ICAI Website for additional study material in the form of Supplementary, Case lets, etc.
Students are also advised to update themselves with the latest changes in the
Risk Management field. The students are, therefore, required to refer academic updates in
‘Students Journal’ published by the Board of Studies, the monthly journal ‘The Chartered
Accountant’, and various newspapers such as Economic Times, Mint, Business Line, Financial
Chronicle and Business Standards.
Although, sincere efforts have been made to keep the study material error free, it is possible
that some errors might have inadvertently crept in. In this respect, students are encouraged to
highlight any mistake they may notice while going through the study material by sending an e-
mail at rm-final@icai.in or write to the Director of Studies, The Institute of Chartered Accountants
of India, A-29, Sector-62, Noida-201309.

Happy Reading and Best Wishes!

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DETAILED CONTENTS

CHAPTER 1 – INTRODUCTION TO RISK

1. Introduction and Definitions…………………………………………………………… ........... 1.1
2. Risk and Uncertainty ............................................................................................... 1.14
3. Classification of Risks ............................................................................................ 1.16
4. Types of Risk .......................................................................................................... 1.18

CHAPTER 2 – SOURCE AND EVALUATION OF RISKS

1. Identification and Sources of Risk ............................................................................. 2.1
2. Quantification of Risk and various methodologies ...................................................... 2.4
3. Risk Identification and Assessment Approaches ...................................................... 2.10
4. Impact of Business Risk........................................................................................... 2.22
5. Identify and assess the impact upon the stakeholder involved in Business Risk ........ 2.26
6. Role of Risk Manager and Risk Committee in identifying Risk ....................................... 2.29

CHAPTER 3 – RISK MANAGEMENT

1. Concept of Risk Management ................................................................................... 3.1
2. Objective and Process of Risk Management ............................................................. 3.5
3. Importance of Risk Management ............................................................................... 3.9
4. Risk Management Techniques ................................................................................. 3.11
5. Risk Management Case Studies .............................................................................. 3.12

CHAPTER 4 – EVALUATION OF RISK MANAGEMENT STRATEGIES

1. Risk Management Strategy alignment with Business Strategy ................................... 4.1
2. Internal Control environment and linkages with Risk Management ............................. 4.5
3. Risk Culture and attitudes to risk management .......................................................... 4.7
4. Integrated Risk Reporting and Stakeholder responsibilities ....................................... 4.9
5. Risk and Opportunity Reporting ............................................................................... 4.15

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6. IT Risk Management – Disaster Recovery ..................................................................... 4.18

CHAPTER 5 – RISK MODEL

1. VAR ......................................................................................................................... 5.1
2. Stress Testing .......................................................................................................... 5.7
3. Scenario Analysis .................................................................................................... 5.11
4. Country Risk ............................................................................................................ 5.14

CHAPTER 6 – CREDIT RISK MEASUREMENT AND MANAGEMENT

1. Understanding Credit Risk ........................................................................................ 6.1
2. Components of Credit Risk ...................................................................................... 6.2
3. Measurement of Credit Risk in Banking Transactions and Factors Affecting
Credit Risk .............................................................................................................. 6.3
4. Types of Credit Facilities ......................................................................................... 6.4
5. Classification of Assets ............................................................................................ 6.7
6. Evaluating Credit Risk .............................................................................................. 6.8
7. Mitigating Credit Risk ............................................................................................... 6.9
8. Qualitative techniques of Credit Risk Management ................................................... 6.12
9. Quantitative techniques of Credit Risk Management ................................................ 6.26
10. Credit Scoring Models ............................................................................................. 6.33

CHAPTER 7 – RISK ASSOCIATED WITH CORPORATE GOVERNANCE

1. Evaluation of Risk Associated with Governance ........................................................ 7.1
2. The Risk Management Function ............................................................................... 7.5
3. Independent Assessment of the Risk Governance Framework ....................................7.6
4. Risk Management Disclosures in India ..................................................................... 7.9
5. Description and evaluation of framework for Board level consideration of risk ........... 7.16
6. OECD Guidelines for Corporate Governance ............................................................ 7.20

CHAPTER 8 - ENTERPRISE RISK MANAGEMENT

1. Definition and Scope of Enterprise Risk Management ................................................ 8.1

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2. Implementing ERM ................................................................................................... 8.3

3. Techniques of Enterprise Risk Management .............................................................. 8.4
4. Risk Maturity of an Organization .............................................................................. 8.6
5. Process of Enterprise Risk Management and Internal Audit ...................................... 8.8
6. Stakeholder Value Creation by Enterprise Risk Management .................................... 8.8

CHAPTER 9 – OPERATIONAL RISK MANAGEMENT

1. Introduction .............................................................................................................. 9.1
2. Relevance of Operational Risk ................................................................................. 9.2
3. Operational Risk Management Governance ............................................................... 9.5
4. Risk Identification and Risk Types ........................................................................... 9.10
5. Understanding of Controls ....................................................................................... 9.15
6. Risk Control Self-Assessment .................................................................................. 9.17
7. Technology Risk ..................................................................................................... 9.17
8. Key Risk Indicators and Scenario Analysis ............................................................... 9.21
9. Business Continuity Plan ......................................................................................... 9.21
10. Outsourcing Risk ..................................................................................................... 9.25
11. Cyber Risk and Information Security Control ............................................................ 9.25
12. Operational Loss Data Management ....................................................................... 9.28
13. Business Analytics and Artificial Intelligence ............................................................ 9.32
14. Insurance ................................................................................................................ 9.36

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